Workplace Pensions

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Independent publication by 01 / 11 / 2015 # 344 raconteur.net REASONS FOR STARTING A PENSION 40% 8% 15% 16% 33% 27% 21% Being automatically enrolled into a workplace pension More money available It's what people do Pensions are tax efficient Qualifying to join a company pension scheme General fear of not having enough in retirement Deciding to save for the long term generally Chance to engage staff with pensions 02 Uncertainty around saving for retirement offers employers the opportunity to provide financial education Will robo-advisers have the last say? 05 Smart technology is providing investment advice and helping pensioners find financial mobility Pension scammers are stealing savings 04 Reforms allowing savers greater freedom over how they use their savings have raised the threat of fraud New investments needed for old age 07 Freedom for small investors to draw down income is an exciting opportunity for people approaching retirement Retirement savings still falling short The UK has never been a likely setting for revolution, but its pension regulation has experienced reform on a scale unsurpassed since Henry VIII executed a hostile takeover of the Church OVERVIEW PADRAIG FLOYD T he greatest change to pensions since the old age pension was in- troduced a century ago was au- to-enrolment. Since October 2012, more than 5.2 million UK workers have started saving for their retirement – an in- crease of almost 60 per cent. This is quite a success given that many an- ticipated high opt-outs in excess of 30 per cent, when in fact they are currently below 10 per cent. This may increase as the smaller employers begin to bring their own pension plans on stream. Getting workers in is only one part of making auto-enrolment a success. The second part is much more important, but also incredibly dif- ficult – getting them to save the right amount. The current levels of saving are totally in- adequate as far as generating a retirement income is concerned. The global consensus is individuals need to save a minimum of 15 per cent of their salary from an early age to gener- ate a meaningful income for when they retire. It is critically important anyone in auto-en- rolment saves more now, but they must be in a good investment vehicle. The pension reforms announced by chancel- lor George Osborne in his 2014 Budget came into force in April. Within a month, 60,000 people had used the resulting free- dom and choice to access more than £1 billion of their pension funds. The vast majority will be small pots of money under the new rules from defined contribution (DC) funds. Those with pen- sions in defined benefit (DB) plans will have to pay for regulated advice before they will be allowed to access their funds. This is just one of the costs left out of all the celebratory coverage the reforms received. Seen as an imposition, it is designed to pro- tect the pension scheme member from suf- fering a huge loss. Those who accessed even relatively modest sums have lived to regret it, as they found the cost of advice outweighed the benefit. Some triggered emergency tax payments which will be recoverable unless the income has altered their marginal rate of tax in which case it will not. A sudden boost in income can also have a disastrous effect on any means-tested bene- fits an individual may be receiving. Of course, all this was meant to be dealt with by the government's Pensions Wise guidance process, but its failings have been acknowledged recently and the service is due for relaunch. It will take some years for the full benefits of the freedoms to become apparent, but they do offer greater flexibility to the individual saver. Not only in saving for retirement, but as pensions can now be passed on to beneficiar- ies, they have become a highly tax efficient estate planning tool. Numbers of withdraw- als from DB workplace pensions have been small compared with DC pen- sions. This may be due to the need for the member to take regulated advice or perhaps members simply know a good thing when they see it. The flexibilities cer- tainly offer the destitute or those with chronic or terminal illnesses access to funds that will materially improve their quality of life. But these reforms were not simply about giving consumers greater choice, but gener- ating more revenue for the Exchequer – as some have found to their cost. A period of consultation has recently ended that may have a profound effect upon pensions savings in the UK. The government issued a green paper in which it outlined potential changes to the tax relief given to pension contributions. Currently they are exempt from tax as are the investment returns, so you only pay tax when an income is taken. The government may seek to change the system so that contributions – for at least certain portions of the working population – come from net pay, where the tax has already been paid. Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 3428 5230 or e-mail info@raconteur.net Raconteur is a leading publisher of special-interest content and research. Its publications and articles cover a wide range of topics, including business, finance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclusively in The Times and The Sunday Times as well as online at raconteur.net The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © Raconteur Media Distributed in DAN BARNES Award-winning business journalist, he specialises in financial technolo- gy, trading and capital markets. CERI JONES Award-winning finan- cial journalist, she has edited Investors Chronicle, Financial Adviser and Pensions Management. SIMON BROOKE Contributor to a number of international publications, he specialises in lifestyle trends, health, business and marketing. ELIZABETH PFEUTI European editor at Chief In- vestment Officer magazine, she was formerly at Dow Jones, Financial News and Global Pensions. ALISON COLEMAN Freelance specialising in business, management and employment, she contributes to the Daily Express and Sunday Express. PADRAIG FLOYD Former editor in chief of the UK pensions and investment group at the Financial Times, and ex-editor of Pensions Management, he is now a freelance business writer. CONTRIBUTORS BUSINESS CULTURE FINANCE HEALTHCARE LIFESTYLE SUSTAINABILITY TECHNOLOGY INFOGRAPHICS raconteur.net/workplace-pensions-2015 RACONTEUR Publishing Manager John Okell Digital and Social Manager Rebecca McCormick Head of Production Natalia Rosek Design Vjay Lad Grant Chapman Kellie Jerrard Production Editor Benjamin Chiou Managing Editor Peter Archer Individuals need to save a minimum of 15 per cent of their salary from an early age to generate a meaningful income for when they retire Share this article on social media via raconteur.net Source: Scottish Widows 2015 WORKPLACE PENSIONS of workers in the UK are now judged to be saving enough for retirement 56% Source: Scottish Widows 2015 This would be a great disincentive to saving into a pension, which still has to be locked away until age 55. Worse still, removing relief from the contributions will reduce the assets in the fund considerably. We must remain optimistic that a balance is struck between saving the Treasury money and encouraging long-term saving because auto-enrolment and pensions as a whole are reliant upon it. However wonderful auto-enrolment and pension freedoms appear, they are both merely works in progress. The government knows only too well that contribution levels must increase if the burden on the state is to be reduced. Rates will increase in 2017, but greater hikes are required to achieve the project's objec- tives. That is not likely to happen in this par- liament as the government will have bigger fish to fry over Europe. But the longer it is delayed, the worse off the next generation will be in retirement as they hold out – perhaps as late as 70 years of age – for their state pension. Pension freedoms are also evolving stead- ily. While some have praised the chancellor for freeing consumers from the shackles of an annuity, an adequate, mass-market re- placement is yet to be found. When asked, the vast majority of savers want a guaranteed income stream in retirement that they can rely upon. This is exactly the function that annuities provide and a great many of those who have retired since the re- forms came into force have purchased one. After 18 months of development, we have started to see the launch of new hybrid prod- ucts that claim to straddle income drawdown and annuity purchase and offer a smoother transition into retirement. We've come a long way in three years, but in many ways we've hardly advanced. The working population of the UK is still saving too little, yet by the time they realise this, it will be too late. PREFERRED OPTIONS FOR MANAGING FINANCES IN RETIREMENT Taking some cash to spend and using the rest for guaranteed income for life Using all my money on a product that will give a guaranteed income for life Taking all my money as cash and investing it how I see fit Investing it in buy-to-let properties Don't know 33% Investing in a pension and drawing income from it each year 26% 13% 11% 9% 8% Chancellor George Osborne standing outside 10 Downing Street on the day of the 2014 Budget

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